Inter Industry Differences in Capital Structure of Indian Corporate : An Empirical Analysis

The purpose of this paper is to investigate empirically the existence of inter- industry differences in the capital structure of Indian firms and to identify the possible implications of such variation in capital structure. We have studied the financing pattern of 300 Indian private sector companies, comprising of 20 different sectors for the period 1999-2000 to 2007-2008 selecting top 15 companies from each sector. By using the techniques of funds flow analysis, ratio analysis and simple correlation analysis, we tried to find out the existence of capital structure differences in different industries and the reason for such differences. The result shows that, capital structures of firms are systematically different across industry classes so far as the debt financing as a proportion of total capital is concerned. It is the differences in external fund requirement based on technology differences that play a leading role in determining the inter-industry variation in capital structure. The average debt-equity ratios of manufacturing companies are more than double of the average debt-equity ratio of service sector companies.It is commonly believed that firms with greater borrowing capacity should borrow more in light of the benefits of tax shield effects and the lower costs of debt-capital in comparison to equity. But contrary to this common belief, we found that the average debt-equity ratio of small sized companies is three times more than the average debt-equity ratio of large sized companies in India. These findings cast doubt on how appropriate it is to use standard western corporate financial theories to Indian corporate?